The legendary value investor Benjamin Graham noted that successful investing requires the “patience to wait for opportunities that may be spaced years apart.” But once those moments arise, it also demands the discipline to stick with them as they unfold over time. That’s a crucial point today’s investors need to remember.
After waiting 15 painstaking years for value to start outpacing growth—which began to take place at the start of 2021—some investors are already turning their backs on the nascent rebound. As interest rates have normalized, you hear conversations where people wonder out loud if they’ve missed the rally. A CNBC headline urged readers: “It’s Too Late to Chase Value, So Get Into Growth Stocks Instead.”
Fund-flow data backs up this trend away from value. In November, the exchange-traded fund with the biggest net inflows was Invesco QQQ Trust, which holds the largest growth stocks in the Nasdaq, nearly half of which are tech. By contrast, the ETF with the single-biggest outflows in November was the Vanguard Value ETF, although the month of December showed a bit of a reversal of these of flows. These flows are surprising in light of the fact that the QQQ was down more than 30% over the past year ending Dec. 31, 2022, while the Vanguard Value ETF was only down approximately 2% during the same period.
The same thing took place shortly after the bursting of the dot-com bubble in 2000, when small value began to outshine mega-cap growth. A mere year into the tech wreck, some investors who felt late to the value cycle assumed they missed their window and chose instead to bet on large growth stocks, which they mistakenly assumed were bargains just because their share prices had fallen.
That turned out to be a loser’s bet. Those who invested in stocks found in the Standard & Poor’s 500 Information Technology index a year into the 2000 bear lost 29% cumulatively over the next five years. By contrast, those who remained patient and continued to invest in small-cap value gained 89%, based on the Russell 2000 Value Index from the start of 2001 through 2005.
For today’s investors wondering if it’s too late to embrace value, that experience should offer an important clue. Growth and value tend to take turns leading the market, but the cycles often last years, not days.
It also highlights an important point: Value investing and “buying on the dips” are not the same thing. Just because popular growth stocks that were once the market’s darlings are down considerably from their peak doesn’t mean they’re cheap. Or cheap enough to make them worth buying. They may well have more room to fall.
Looking back at 2000, investors who bought beaten-down growth stocks on the dips were not thinking like true bargain hunters. As Graham noted, the intelligent investor focuses on the fundamentals and is always conscious of building in a margin of safety to their strategy.
At the end of 2000, small- and mid-cap value were still more attractively priced than large-cap growth, even after tech’s big losses. For instance, the S&P 500 Information Technology sector’s earnings yield—which measures the earnings per share generated by an investment divided by the price per share—stood at 3.1%. That was well below the 7.4% earnings yield for the Russell 2000 Value index.
Perhaps if tech’s earnings yield had been higher than the interest rate paid by “risk-free” assets like Treasury bills, they might have had some appeal. But that wasn’t the case. Tech’s earnings yield in December 2000 was 2 percentage points lower than what T-bills were paying; in other words, its market risk premium was negative. Why would anyone bet on an investment exposing them to heightened market risks when they could earn more from riskless cash? An important point to consider as we come out of a prolonged period of abnormally low rates.
Fast forward to today—impatient investors who are thinking about buying beaten-down growth stocks should understand that the situation mirrors the dot-com bubble era. The market risk premium for tech stocks is again negative. Meanwhile, with earnings yields of 10.5% and 7.4%, respectively, for stocks in the Russell 2000 Value and Russell Midcap Value indexes look far more attractive than large-cap tech, even after the 2022 slide.
This emphasizes why investors must avoid acting on gut instinct and instead focus on the fundamentals, especially at a time when market risks are on the rise.
Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to [email protected].
Impatient Investors Need to Remember the Lessons of the Dot-Com Bubble
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Pedestrians pass in front of the New York Stock Exchange in New York. Growth and value tend to take turns leading the market, but the cycles often last years, not days, writes Michael Kops.
Michael Nagle/Bloomberg
About the author: Michael Kops is a vice president and partner at Heartland Advisors, a value-focused investment firm.
The legendary value investor Benjamin Graham noted that successful investing requires the “patience to wait for opportunities that may be spaced years apart.” But once those moments arise, it also demands the discipline to stick with them as they unfold over time. That’s a crucial point today’s investors need to remember.
After waiting 15 painstaking years for value to start outpacing growth—which began to take place at the start of 2021—some investors are already turning their backs on the nascent rebound. As interest rates have normalized, you hear conversations where people wonder out loud if they’ve missed the rally. A CNBC headline urged readers: “It’s Too Late to Chase Value, So Get Into Growth Stocks Instead.”
Fund-flow data backs up this trend away from value. In November, the exchange-traded fund with the biggest net inflows was Invesco QQQ Trust, which holds the largest growth stocks in the Nasdaq, nearly half of which are tech. By contrast, the ETF with the single-biggest outflows in November was the Vanguard Value ETF, although the month of December showed a bit of a reversal of these of flows. These flows are surprising in light of the fact that the QQQ was down more than 30% over the past year ending Dec. 31, 2022, while the Vanguard Value ETF was only down approximately 2% during the same period.
The same thing took place shortly after the bursting of the dot-com bubble in 2000, when small value began to outshine mega-cap growth. A mere year into the tech wreck, some investors who felt late to the value cycle assumed they missed their window and chose instead to bet on large growth stocks, which they mistakenly assumed were bargains just because their share prices had fallen.
That turned out to be a loser’s bet. Those who invested in stocks found in the Standard & Poor’s 500 Information Technology index a year into the 2000 bear lost 29% cumulatively over the next five years. By contrast, those who remained patient and continued to invest in small-cap value gained 89%, based on the Russell 2000 Value Index from the start of 2001 through 2005.
For today’s investors wondering if it’s too late to embrace value, that experience should offer an important clue. Growth and value tend to take turns leading the market, but the cycles often last years, not days.
It also highlights an important point: Value investing and “buying on the dips” are not the same thing. Just because popular growth stocks that were once the market’s darlings are down considerably from their peak doesn’t mean they’re cheap. Or cheap enough to make them worth buying. They may well have more room to fall.
Looking back at 2000, investors who bought beaten-down growth stocks on the dips were not thinking like true bargain hunters. As Graham noted, the intelligent investor focuses on the fundamentals and is always conscious of building in a margin of safety to their strategy.
At the end of 2000, small- and mid-cap value were still more attractively priced than large-cap growth, even after tech’s big losses. For instance, the S&P 500 Information Technology sector’s earnings yield—which measures the earnings per share generated by an investment divided by the price per share—stood at 3.1%. That was well below the 7.4% earnings yield for the Russell 2000 Value index.
Perhaps if tech’s earnings yield had been higher than the interest rate paid by “risk-free” assets like Treasury bills, they might have had some appeal. But that wasn’t the case. Tech’s earnings yield in December 2000 was 2 percentage points lower than what T-bills were paying; in other words, its market risk premium was negative. Why would anyone bet on an investment exposing them to heightened market risks when they could earn more from riskless cash? An important point to consider as we come out of a prolonged period of abnormally low rates.
Fast forward to today—impatient investors who are thinking about buying beaten-down growth stocks should understand that the situation mirrors the dot-com bubble era. The market risk premium for tech stocks is again negative. Meanwhile, with earnings yields of 10.5% and 7.4%, respectively, for stocks in the Russell 2000 Value and Russell Midcap Value indexes look far more attractive than large-cap tech, even after the 2022 slide.
This emphasizes why investors must avoid acting on gut instinct and instead focus on the fundamentals, especially at a time when market risks are on the rise.
Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to [email protected].
Source: https://www.barrons.com/articles/investors-need-to-remember-the-dot-com-bubble-growth-value-tech-stocks-51673041265?siteid=yhoof2&yptr=yahoo